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Colgate: Lacklustre margins in FY12
Jun 4, 2012

Colgate-Palmolive (India) Limited has announced its fourth quarter results for financial year 2011-12 (4QFY12) results. The company has reported a 18% YoY increase in sales and 14.7% YoY jump in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 17.6% in 4QFY12. For the full year FY12, revenues were up by 17.8% led by 12% volume growth with the toothpaste category clocking growth of 14%.
  • Operating (EBITDA) margin for the quarter expanded by 60 basis points as rationalization in advertisement and raw material costs offset higher staff costs and other expenditure. However for FY12, a sharp rise in cost of goods sold and other expenses (as a proportion of sales) shaved off 100 basis points from the operating margin.
  • Earnings increased at a relatively subdued 14.7% due to a steep 45.7% jump in tax outgo. For the full year, earnings grew by 11%.

Standalone financial snapshot
(Rs m) 4QFY11 4QFY12 change FY11 FY12 change
Total Revenue 5,978 7,029 17.6% 22,861 26,932 17.8%
Expenditure 4,570 5,331 16.6% 17,716 21,147 19.4%
Operating profit (EBDITA) 1,408 1,699 20.6% 5,146 5,785 12.4%
EBDITA margin (%) 23.6% 24.2%   22.5% 21.5%  
Other income 112 131 17.8% 412 507 22.9%
Interest 3 2 -30.8% 16 15 -6.2%
Depreciation 88 100 13.9% 343 393 14.8%
Profit before tax 1,429 1,728 20.9% 5,200 5,884 13.2%
Extraordinary item - -   - -  
Tax 288 420 45.7% 1,174 1,419 20.9%
Profit after tax/(loss) 1,141 1,308 14.7% 4,026 4,465 10.9%
Net profit margin (%) 19.1% 18.6%   17.6% 16.6%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*         32.8  
Price to earnings ratio (x)*         35.3  
(*On a trailing 12-month basis)

What has driven performance in 4QFY12?
  • Colgate’s revenues increased by 17.6% in 4QFY12. The company enhanced its leadership position in the toothpaste category to 54% volume market share from 52.2% in the year-ago period. Colgate continued its dominant position in the toothbrush category and increased its volume market share in the mouthwash category to 26.2% from 25.7% in the year-ago period.

    As a % of net sales 4QFY11 4QFY12 Change in basis points
    Cost of goods 40.02% 39.09% -92.96
    Staff costs 7.2% 7.4% 15.56
    Advertisement 8.5% 8.3% -23.73
    Other expenditure 20.7% 21.1% 39.93

  • The company continued to reduce promotional spends in proportion to sales that fell from 8.5% to 8.3%. Aided by commodity inflation easing off, even cost of goods sold to sales ratio declined by around a percentage point to 39% for the quarter. These enabled Colgate to withstand higher staff costs and other expenses and expand operating margin by 60 basis points in 4QFY12.

  • However, at the net level a steep 46% jump in tax outgo compressed profitability by 50 basis points. The tax incidence increased to 24% from 20% in the year-ago quarter. Other income grew by 17.8% during the quarter.

What to expect?
In FY12, Colgate posted a robust 18% topline growth led by 12% higher offtake. The company maintained its leadership in the toothpaste segment with a 14% growth. However, high commodity inflation played spoilsport. But the company, on the back of controlled advertisement spends and staff costs, has managed to limit margin contraction to a mere 100 basis points.

At a price of Rs 1160, the stock is trading at 28 times our estimated FY14 earnings. At current valuations, the stock appears overpriced and we would advise investors to exercise caution.

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